These days, buyers worry far less about credit risk than they do about compliance risk, according to Richard Davis, the chairman and chief executive at U.S. Bancorp.

Speaking at the American Banker Regulatory Symposium this fall, Davis said evaluating a seller's loan portfolio is relatively easy, because bankers understand the fundamentals of credit risk and because credit quality is generally pristine nowadays. Much harder to assess is whether any missteps occurred in, say, the filing of suspicious activity reports or the modifications made to home loans — violations that might not be discovered until years after the fact. And it can be impossible to spot outright fraud.

"The public, which evaluates brand reputation, doesn't remember who bought what," Davis said in a question-and-answer session with reporters following his speech. "That's got to weigh heavily because you protect your brand first and foremost."

Davis wasn't alone in stressing the importance of protecting the brand at the two-day conference. In keynote after keynote, panel after panel, speakers kept coming back to the message that reputation is everything.

In the opening speech, Federal Deposit Insurance Corp. Chairman Martin Gruenberg urged banks' to be vigilant about cybersecurity, suggesting that lax policies could damage their reputations. In her speech on day two, Jennifer Shasky Calvery, the director of the Financial Crimes Enforcement Network, or FinCEN, stressed that a strong anti-money-laundering policy not only helps avoid a large fine, "it saves your institution's reputation, which is something you can't put a price on."

Comptroller of the Currency Thomas Curry also hit on the reputation theme, reminding bankers that weak anti-money-laundering controls will almost surely hinder their ability to make acquisitions. Curry advised buyers to be sure that their bank and the banks they are planning to acquire are in full compliance with all Bank Secrecy Act reporting requirements.

Regulators are taking an increasingly tough stance on BSA enforcement and it's a virtual guarantee that they will delay — and delay some more — any deals whose participants have issues in that area. BancorpSouth this summer withdrew applications for two planned acquisitions after drawing regulatory scrutiny of its BSA compliance, and M&T Bank Corp. is in the midst of overhauling its anti-money-laundering controls as it tries to complete a deal for Hudson City Bancorp that's been pending for two years.

Calvery refuted bankers' frequent claims that the suspicious activity reports they file each year fall into a "black hole," arguing that the reports are crucial to helping law enforcement initiate cases or expand existing cases.

She said that, from March 2013 to April 2014, 34% of the FBI's investigations of organized crime and drug trafficking sprung from suspicious activity reports filed by financial institutions. She added that, in the month prior to her speech, FBI investigators had come across 2,500 reports that were directly relevant to more than 1,000 ongoing cases.

Still, filing those reports is a burden for banks, especially small ones. In a panel discussion, McCall Wilson, the CEO of the Bank of Fayette County in Moscow, Tenn., questioned why banks like his face the same reporting requirements as larger ones. He said that community bankers know their customers well enough to recognize whether a transaction looks suspicious. "It has gone so far out of whack," said Wilson. "The paperwork is not worth the effort we are putting into it."

Calvery, though, wants bankers to think of BSA compliance not as a nuisance, but as their civic duty. And creating a "culture of compliance," as she put it, starts at the top. "First and foremost, leadership should be engaged," she said. "The commitment of an organization's leaders should be visible, as such commitment influences the attitudes of others within the organization."

She added that compliance "should not be compromised by revenue interests," noting that some BSA enforcement actions have come as a result of top bank officials withholding information from employees whose job is to report suspicious activity to FinCEN. "Information-sharing is important because being a good corporate citizen and complying with regulatory responsibilities is also good for a company's bottom line," Calvery said.

The conference was a civil affair, though things did get testy during a panel discussion on a Justice Department probe known as Operation Choke Point. Choke Point's aim is to prevent fraudulent merchants from accessing the payments system, and its mere existence has prompted many banks to stop doing business with payday lenders and other businesses that may be seen as unsavory, such as gun dealers and porn shops. Depending on who you ask, the probe is either a legitimate attempt to protect consumers from fraud or an example of egregious government overreach that has essentially spooked banks into cutting ties with perfectly legal businesses.

It was the most lively panel of the conference, especially when Kenneth Edwards, the vice president of federal affairs at the Center for Responsible Lending, and Dennis Shaul, the CEO of a trade group that represents storefront payday lenders — the Community Financial Services of America — squared off over the probe's impact on payday lending. Shaul complained that, as a result of Choke Point, many legal, licensed payday lenders have had their accounts closed by banks and now have nowhere to keep their deposits.

As Edwards sees it, that's not a bad thing. Payday loans "lead to an evisceration of personal wealth," he said. If banks and third-party processors do business with high-risk businesses like payday lenders, then it is appropriate for regulators to "bear down" on them, he argued.

But Shaul disagreed that payday lenders pose a risk to banks. "Contrast the 20-year history of payday lending accounts and most of the banks that have discontinued this, and ask yourself: Where was the safety-and-soundness question? Where was the infamous incident that led someone to say, 'Gee, this is a reputational risk?' It's nonexistent," he said.

Shaul also worries that Choke Point will wind up forcing banks to cut ties with businesses they view as morally questionable. "Everywhere I go, people come up to me and give me more examples. Last year it was career education, sometimes it's commercials on TV, sometimes it's ammunition sellers," he said. Ultimately, Choke Point affects "much more" than just payday lenders. 

4th Annual American Banker Regulatory Symposium
When: Sept. 22-23
Where: Westin Arlington Gateway, Arlington, Va.
For: Bankers, regulators, legislators and lawyers
Attendees: 150
Host: American Banker
Key themes:

  • Reputation risk
  • Bank Secrecy Act enforcement
  • M&A hurdles

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